Confidence comes from a belief in understanding a situation, even if the conclusion or “reason why” is inaccurate. Placing a name to the culprit or the potential cause of a condition generates more ease internally. It’s inflation, consumer debt, student loans, energy bills, volatility, individuals doing their retirement planning, interest rates, the Republicans, the Democrats, the Federal Reserve, Putin; you get the point.
Provided naming the obstacle doesn’t create any false sense of security that leads you astray, the pondering and pontifications are normal and acceptable. The danger resides in acting upon an ill-founded conclusion. Confidence, excessive and lacking, can lead us down a primrose path of financial frustrations.
Apologies in advance as I cannot locate the author of this research, but I will never forget the lesson I learned. On a bumper sticker, people’s neurological responses or emotions regarding financial outcomes mimic cocaine and mortal danger. The fear of loss will always trump the hope of favorable results. When things look dire, the brain responds with the “flee” mentality, and the same brain activity occurs when a 750-pound grizzly bear is chasing the subject. When the tide is in the right direction, financial gain appears to have the same chemical response as a person on cocaine. That is behavioral finance in a nutshell.
If you enjoy the evening discussions over the many potential culprits, feel free to continue. The trick is not allowing your “gut feeling” or intuition to cause a reaction that can destroy years of financial discipline. Experiences from the previous 35 years repeatedly demonstrated that we tend to remember when we were correct in beliefs we didn’t act upon, but seldom do we recall the mistakes we would have made had we acted, myself included. The mind can play tricks on us!
Your investment discipline should only be impacted by new information and where you have a predetermined response to the “surprise” announcement. We have been asked why the market responded so poorly to the inflation numbers released on Tuesday, September 13, 2022. The first assumption was that the market went down because of the inflation “culprit.” We don’t know the reason, but naming the cause gives us more clarity.
The consumer continues to drive the economy, and reasons exist where the higher-than-expected inflation rate likely impacted various investments. Your job as an investor is to have a discipline that already has a playbook for multiple outcomes or conditions that would cause you to make a change. Creating the process is monotonous. Following the discipline is even more difficult but mandatory for financial success.
The great recession created many horror stories. The worst was those who invested for 30 years of their lives waiting for a comfy retirement. Panicked over things that came from the blue – yet were discussed as potential challenges in this column a year before their occurrence – and sold their entire investment accounts at the worst possible time. Their future dramatically changed over an emotional response to a culprit they named but didn’t understand. In this time of financial uncertainty, exercising investment discipline has become more important than ever.
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.